BHI: US rig count continues downward slide

The US drilling rig count fell 34 units—all on land—to 954 rigs working during the week ended Apr. 17, according to data from Baker Hughes Inc.

The slide has now lasted 19 consecutive weeks, during which time the count has plunged 966 units (OGJ Online, Dec. 5, 2014). The total of 954 is the lowest since the week ended July 31, 2009, and 877 fewer units compared with this week a year ago.

The impact of more and more rigs going offline on US oil production is showing, according to the US Energy Information Administration’s monthly Drilling Productivity Report (DPR), which expects overall output from US shale plays to decline 57,000 b/d in May compared with April to 5.56 million b/d (OGJ Online, Mar. 10, 2015).

The first declines in major US shale plays were projected by EIA to occur this month, with output dropping from the Eagle Ford, Bakken, and Niobrara.

Paul Horsnell, head of commodity research at Standard Chartered, said this week that he believes the low counts “imply that the month-on-month decline will exceed 70,000 b/d by June.”

June trough, then recovery?

Raymond James & Associates Inc. said in a recent energy update that it expects the total US rig count will decrease to a trough of 930 total units in June from a peak of 1,931 in September 2014.

“While we do not think we have quite bottomed, we believe the industry is close to the bottom,” RJA said. “However, we think the [first-half] downward correction was too much, too fast relative to what was needed to rebalance the system.”

RJA noted that during the 2008-09 financial crisis, the pace of overall declines averaged 55 rigs/week at its steepest point. However, during this year’s first quarter, declines averaged 65 rigs/week.

Fitch Ratings analysts noted this week that onshore drilling markets tend to be more volatile compared with offshore markets, which only recently started a noticeable decline in working rigs, because contracts typically are shorter. And the “regionally stratified” onshore rig fleet is more exposed to regional supply-demand imbalances (OGJ Online, Apr. 17, 2015).

RJA nevertheless believes “a flattening in the US oil supply growth rate beginning in the next month should signify the beginning of a slow but steady recovery in US oil field activity.”

It expects the “count to gradually rebound in the second half of 2015 and continue to grow throughout 2016,” posting a 2015 average of 1,071 units, down 42% from 2014. Next year RJA sees the US rig count climbing 10% year-over-year, peaking at 1,332 and averaging 1,176.

“We expect that this trajectory in oil field activity will lead to flattish US oil production [year-over-year] in 2016, and therefore a balanced global market by the end of 2016,” it projected. “Assuming global oil demand growth continues to chug along growing about 1 million b/d over the next five years, then US drilling activity will need to rise steadily through 2016 and 2017 to meet global demand growth.”

This week’s overall losses

During the week, the 34-unit drop in land rigs brought its total to 917. Offshore rigs and rigs drilling in inland waters were unchanged at 33 and 4, respectively.

Cowen & Co. analysts noted this week in a report about Transocean Ltd., which most recently disclosed plans to scrap the ultradeepwater GSF Explorer drillship, that just 13 of the rigs recently removed from the company’s global fleet had worked in the past year. By their count, retirement of the GSF Explorer will bring the number of international offshore rigs scrapped during the past 6 months to 33.

“We expect that [approximately] 100 floaters will eventually need to be retired in order to bring the market back into balance,” they said.

Oil rigs fell 26 units to 734, down 776 units compared with this week a year ago. Gas rigs shed 8 units to 217. Rigs considered unclassified were unchanged at 3.

Rigs engaged in horizontal drilling plunged 29 more units to 741. Since Nov. 21, 631 horizontal units have gone offline. Rigs drilling directionally, meanwhile, edged up a unit to 91.

Compared with the overall US rig count, RJA sees the horizontal count holding up “relatively better,” falling 37% year-over-year in 2015, bottoming out at 703 units in June. In 2016, it expects the horizontal count to be up 13%, modestly outpacing the recovery in the total US rig count.

“We believe it is likely that many of the legacy rigs and lower-end rigs dropped during the downcycle will disappear forever,” RJA said. “We estimate that horizontal rigs will represent about 94% of the total rigs added from the bottom in [the third quarter] through December 2016, representing 83% of active US rigs at the end of 2016.”

Also in North America, Canada’s rig count shed 19 units to 80, the country’s lowest total since May 22, 2009, and down 360 units since only Jan. 16. All of those rigs targeted gas, bringing its total to 60. Oil rigs were unchanged at 20.

Major states, basins

Texas this week maintained its top spot in losses among the major oil- and-gas producing states, losing 15 units to 412, down 472 year-over-year and 494 since Nov. 21.

Losses in the Permian and Eagle Ford slowed during the week. The Permian shed 6 units to 258, down 282 year-over-year, while the Eagle Ford shed 2 units to 123, down 94 year-over-year.

The Granite Wash dropped 6 units to 17. The Mississippian led all basins with a 9-unit plunge to 31.

Oklahoma lost 6 units to 118. North Dakota lost 5 units to 83, reflecting a 5-unit drop in the Williston to 84. Wyoming lost 4 units to 23. Pennsylvania, California, and Kansas each lost 2 units to 48, 13, and 11, respectively. Ohio, Alaska, Arkansas, and Utah each edged down a unit to respective totals of 25, 12, 8, and 7.

EIA’s DPR has oil production in May continuing to decline in the Eagle Ford, Bakken, and Niobrara, with the respective plays shedding 33,000 b/d to 1.69 million b/d, 23,000 b/d to 1.3 million b/d, and 14,000 b/d to 403,000 b/d. The Permian, on the other hand, is expected to increase 11,000 b/d to 1.99 million b/d, although that represents a little more than half of April’s growth.

In the Eagle Ford, however, IHS this week noted that producers have built an inventory of nearly 1,400 drilled but uncompleted (DUC) wells, which can be converted to producing assets for 65% of the cost of a new drill (OGJ Online, Apr. 13, 2015). One IHS analyst believes Eagle Ford DUC wedge production alone could generate an additional 180,000 b/d of oil in the second half.

RJA sees an overall recovery being “led by the core plays, with the Permian, Eagle Ford, and Bakken seeing activity increase first,” it said. “The average total rig count in the Permian, Eagle Ford, and Bakken are expected to grow about 11%, 6%, and 4%, respectively.”

This is expected to account for just less than 47% of total rig additions, or 160 of 342 rigs, from the bottom in the third quarter through December 2016, with 30%, or 102 rigs, going to the Permian.

States that reported no rig movement from last week included Colorado at 36 and West Virginia at 22. Two states reported gains, with New Mexico rising 2 units to 49 and Louisiana rising 5 units to 72.

Contact Matt Zborowski at matthewz@ogjonline.com.

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